A successful test of the 2004 lows?

Tuesday's set ups: XTC, CTSH, Defense, OSTK, MOGN, MICC, ZBRA, KMRT

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Consistent with the recent pattern, the Nasdaq led the markets lower posting a single-day loss of 10 points. At the same time, the Dow Industrials and the S&P 500 held steady, edging lower by just 1 and 2 points respectively.

The Nasdaq's hourly chart above serves as a detailed view of the past two weeks.

Probably the most obvious take away ties to the magnitude of its recent losses. Since topping Wednesday at 1,933 the index has lost more than 100 points, or 5.4 percent, in a matter of just four sessions.

Stepping back even further, from the June 30 high at 2,055, the Nasdaq has dropped as much as 226 points, or 11 percent, in just under one month.

Also note that with the exception of last Tuesday's bounce, the index has generally trended under its 20-period moving average. Over the past seventeen sessions, there have been just two closes above that 20-period moving average.

So while July's losses have been steep, they've also been virtually straight down -- the index has experienced little in the way of meaningful buy interest.

The near-term story of the Dow Industrials matches closely with that of the Nasdaq.

Like the Nasdaq, the Dow edged to new lows Monday, retaining its stance under the 10,000 level. Yet by day's end, the Dow closed at 9,961 matching closely with support around the Thursday low.

Not surprisingly, the near-term picture on the S&P 500 is similar to that on the Dow Industrials.

Like the Dow, the S&P made new lows Monday before lifting toward former support around the Thursday low.

Widening the view to the daily time frame illustrates the less-than-bullish broader picture.

The S&P 500 continues to place distance under its 200-day moving average, and Monday edged within 2 points of its 2004 low.

Since finding resistance at its 50-day moving average Wednesday (illustrated on the hourly chart) the S&P has traded straight down to test its 2004 lows.

By ending Monday at 9,961, the Dow Industrials has carved out two consecutive closes under the 10,000 level.

It's also worth reiterating the Dow triggered a bearish 50-day/200-day moving average crossover Friday. Based on the current picture, its 50-day moving average holds at 10,214 (in black), while its 200-day moving average holds at 10,218 (in blue).

In a downtrending market, the crossover confirms that the directional near-term momentum has violated the longer-term uptrend. Yet in a range bound market, this signal is less useful as strict adherence to the crossover can lead to a series of meaningless whipsaws.

Which kind of market this is -- range bound or downtrending -- should be more evident as the S&P 500 and the Dow continue to test the 2004 lows.

With Monday's 10-point loss, the case for a "range bound" market on the Nasdaq has become even more difficult to make. For two straight sessions, the index has closed at new 2004 lows.

Again, note the steep slope of the sell pressure throughout July.

Remember the July breakdown has followed shortly after the Nasdaq's own bearish 50-day/200-day moving average crossover in late June.

The bigger picture

The broader technical picture remains essentially the same following Monday's losses. Again, the longer-term outlook favors additional losses, and for better or worse, this will remain the case until the indices reclaim their major moving averages.

To start, the S&P 500 has convincingly taken out its 200-day moving average. This signals that the longer-term trend has turned lower, and is the first time in 15 months the index is positioned under that major moving average.

Looking to the Dow, it now threatens 2004 lows, following two consecutive closes under the 10,000 level.

And of course, the Nasdaq has traded to nine-month lows for three straight sessions now.

So from a trading perspective -- outside the straight technical read -- the markets are deeply oversold near-term and difficult not to buy.

Yet the problem is that technical analysis is designed to provide an analytical framework for making that decision to buy. The entire point is to steer investors away from impulsive trading decisions.

And unfortunately, from a strictly technical perspective, there isn't much reason to buy here -- at least not yet.

Each of those three technical developments mentioned above is distinctly bearish, followed Wednesday's distribution day, and has occurred just ahead of August which is seasonally the worst month of the year.

So from a strictly technical perspective it probably makes sense to wait for a better near-term set up. If the indices could hold at these 2004 lows and reclaim their 20-period moving averages, that might provide the backdrop for a sustainable near-term uptrend.

The longer-term outlook remains bearish, just as it has going back to the July 7, July 8 and July 9 reviews.

Tuesday's watch list

The charts below identify several names worth watching from a technical perspective. These are intended as radar screen names -- sectors or stocks that appear well positioned for a potential move in the specified direction over the near term.

Company/Index

Symbol

Mon Close

Support

Resistance

Telecom Index

XTC

602.57

592.5

610

Profiled just Thursday, the Telecom Index remains among the few "non-energy" sectors well positioned to rise.

The index is positioned above both its major moving averages and, as the chart above illustrates, has trended above its 50-day moving average for nearly two weeks.

Also note the index carved out a "higher low" in July while the Nasdaq touched nine-month lows Monday. The favorable outlook would deteriorate on a break below its 200-day moving average, currently at 592.5.

The three charts below illustrate sector components well positioned to rise. Sprint FON Group (FON: news, chart, profile), initially profiled July 13, has traded to its best levels since April on increased volume. Telephone & Data Systems (TDS: news, chart, profile) made a two-year high last week, and BellSouth
BLS, -3.70%
edged above its 200-day moving average Monday on increased volume.

The move placed it within striking distance of five-month highs, and the near-term outlook would further improve on a close above the June high of $26.64. Initial support at $23.70 currently matches its 50-day moving average.

Defense names continue to outperform in a down market

The defense sector is another group pushing new highs despite -- or perhaps because of -- sell pressure on the broad markets.

The three charts above illustrate names in the group recently profiled in The Technical Indicator.

BE Aerospace
BEAV
initially profiled Friday, has since returned 15.5 percent. Though admittedly extended near-term, it remains well positioned for longer-term gains barring a violation of the breakout point around $7.60.

Flir Systems
FLIR, -0.79%
was initially profiled July 19, and its longer-term outlook also remains comfortably bullish. Initial support at $59.65 marks the top of the gap created last week, and is followed by the bottom of the gap at $57.38.

And Northrop Grumman
NOC, -0.25%
profiled July 8, is actually lower by less than a point since. Even so, it has outperformed the broad markets, and remains positioned above support at the February high around $52.60.

Note that over the past three sessions, it has reclaimed its 50-day moving average, currently at $35.40, while the Nasdaq has broken to nine-month lows. The move has come on strong volume, placing it within striking distance of all-time highs.

Also note that Overstock's strength runs counter to general Internet sector weakness, with high profile names such as Amazon
AMZN, -0.89%
and Digital Insight
DGIN
making 11-month lows Monday.

The move occurred on strong volume, and placed it at five-month lows, leaving it vulnerable to further losses. It will take a sustained break back above that 200-day, currently at $25.45, to neutralize the bearish longer-term outlook.

Note that four of the past six sessions have been distribution days (down days on above average volume) leading to that violation of its 50-day moving average. From current levels, that 50-day holds at $65.00, and secondary support at $58.26 matches the top of the early June gap.

Still well positioned

The table below includes selected names recently profiled in The Technical Indicator that remain well positioned. For the full list, including more recent set ups, please subscribe to The Technical Indicator. Learn more and subscribe.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.